Ethereum inflation increases, raising concerns about its deflationary reputation

A new report from Binance Research highlights that Ethereum’s inflation rate has reached a two-year high, challenging its status as "ultrasound money." The rise in inflation is attributed to a reduction in transaction burns, largely driven by the increasing use of layer-2 solutions.

According to Binance’s October 2024 Market Insights report, Ethereum’s inflation rate has surged to 0.74%. This marks the highest inflation level in two years, as lower on-chain activity and fewer transaction burns are affecting the cryptocurrency’s deflationary status.

The report points out that Ethereum, co-founded by Vitalik Buterin, may struggle to maintain its deflationary nature, which has been a key part of its narrative. A significant reason for this is the impact of layer-2 solutions, such as Arbitrum and Optimism, which process transactions off the Ethereum mainnet. While this reduces gas fees, it also results in fewer burned ETH tokens, weakening the deflationary mechanism introduced with Ethereum Improvement Proposal (EIP) 1559 in 2021.

A Binance spokesperson mentioned that the adoption of lower-fee layer-2 networks, accelerated by the recent Dencun upgrade, has slowed down the burn rate. However, they emphasized that Ethereum’s inflation rate remains below 1%, suggesting that the situation could shift back to a deflationary trend if network activity increases.

The report also raises questions about Ethereum’s "ultrasound money" narrative, noting that transaction fees and the volume of burned ETH have significantly decreased over the past year, with September 2024 recording some of the lowest levels since the Merge.

Additionally, Vitalik Buterin has recently advocated for reducing the minimum staking requirement for solo validators, proposing a lower threshold to encourage more participation in Ethereum staking, further strengthening the network’s decentralization.